Australian dollar heading to US80c: Goldman Sachs

Goldman Sachs has lowered its Australian dollar forecast for the next 12 months to US80¢ as it tips a decline in the terms of trade, less supportive capital flows, concerns about Chinese financial conditions and a further cut in interest rates.

The revised forecast came as the Australian dollar remain fairly resilient despite sharp falls in the price of iron ore and copper earlier this week, and as fears of slowing Chinese growth re-emerged.

The local currency briefly traded above US91¢ on Friday morning, following a almost US1¢ rise on Thursday on the back of better-than-expected jobs data. The dollar was fetching US90.32¢ in late trade as concerns about Ukraine and weaker data from China weighed on the currency.

The investment bank lowered its three, six and 12-month forecasts to US85¢, US82¢ and US80¢ respectively. The forecasts were US90¢, US88¢ and US85¢ previously.

"Our bearish Australian dollar forecast is underpinned by expectations that US data weakness is transitory, headwinds to Australian growth are intensifying, the next phase in the decline in the terms of trade has commenced and capital flows are turning less supportive," Goldman Sachs' chief economist for Australia Tim Toohey said in a note.

"Geopolitical risks and ongoing concerns over the impact of tightening Chinese financial conditions together risk a more immediate downward adjustment in the Australian dollar."

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Currency creep or collapse

Goldman's outlook for the Aussie is among the most bearish. The median forecast for the Australian dollar, according to Bloomberg, is for the currency to fall to US84¢ in 2015. At the top end of the forecasts, analysts expect the dollar to rise to US97¢. The lowest forecast for the end of next year is US75¢.

The currency has now gained 1.4 per cent against the US dollar since the start of the year, after declining than 14 per cent in 2013.

Westpac's senior currency strategist Sean Callow said the resilience of the local dollar was in part driven by the fact that much of the financial and economic risk from China had already been priced in last year.

"I think it is certainly a strong indication that Aussie sitting at US105¢ was very vulnerable to that combination of news [last year], but an Aussie sitting either side of US90¢ is not nearly such an obvious sell from here," Mr Callow said.

Last month, Deutsche Bank's chief economist for Australia Adam Boyton said the Australian dollar could face a "benign collapse" to US66¢ by the end of next year amid falling commodity prices, declining mining investment and reduced government spending.

Mr Toohey said the Australian economy looked set to continue growing below-trend as the mining investment boom unwinds, key commodity prices weaken and the non-mining economy struggles to fill the gap left by the resources sector. The trend pace of growth is about 3 per cent. The economy grew at a seasonally adjusted 0.8 per cent in the December quarter, taking the annual growth rate to 2.8 per cent.

Goldman forecasts the unemployment rate, which is currently at 6 per cent, to increase to 6.2 per cent in the first half of this year.

"We expect this increase in spare capacity to contain inflation, even with the recent Australian dollar depreciation, with the recent upside surprise in [the fourth quarter of 2013] due, in part, to a temporary weather-induced lift in local food prices," Mr Toohey said.

The surprise jump in fourth-quarter inflation has partly driven the Reserve Bank to move towards a neutral monetary policy stance and tip a "period of stability" in interest rates.

But Mr Toohey said Goldman expected the RBA to ease rates by 25 basis points in July, before making its first rate rise in the second-quarter of 2015.

Financial markets are pricing in a 20 per cent chance of a 25 basis points hike in the cash rate over the next 12 months, Credit Suisse data showed.